Are there any safe investments out there? Technically, no investment is 100% safe, but some offer better tax benefits than others. We will discuss some safer investments for the more risk-averse.
Modern investing in the Digital Age has become very advanced with more people understanding important risk management principles. Generally, a conservative investment will be issued by a stable government in the form of bonds. Governments don’t want to engage in double taxation, so they might offer certain tax-free or tax-exempt investments.
Generally, young people are encouraged to purchase risk-tolerant corporate stocks. Companies might pay handsome dividends, but they also might have unprofitable years. Young people are in their prime wage-earning years, so they can recover any losses.
Profitable tax saving options allow you to both earn income, while also reducing your tax liability. This can be especially beneficial for those who have moved into a higher tax bracket due to successful wealth building. Wealthy investors might be able to re-invest their profits in tax-free investments to reduce their taxable income.
Although the Equity Linked Savings Scheme (ELSS) and Unit Linked Insurance Plan (ULIP) are more conservative investments governed by the Income Tax Act Section 80C, they are also linked to markets. Therefore, they still involve higher levels of risk. We will find safer investments that are tax-free, tax-exempt or both.
Tax-Free vs Tax-Exempt
Tax-free means that the interest is not taxed, while tax-exempt means that the principal is not taxed. Tax-exempt is better than tax-free.
Tax-free investments include Government of India bonds. These have maturity dates of 10 to 15 years. This type of long-term investment is relatively safe, due to the accrued wealth of the Government of India. Unlike companies, the government is unlikely to go out of business.
Reducing your taxable income is best accomplished with tax-exempt investments, such as long-term bank deposits and long-term post office deposits. While the principal is tax-exempt, you do need to pay taxes on the interest.
Tax-Free & Tax-Exempt Investments
And, now to the coup de grâce – both tax-free and tax-exempt investments. Under Section 80C of the Income Tax Act, you can invest in a Public Provident Fund (PPF). Since it its backed by the Government of India, you only lose money if India goes bankrupt. But, what are the chances of that happening?
High net-worth investors can open their PPF account at a bank or post office with minimal documentation. Interest is accumulated and paid when you withdraw the funds. At its maturity, this income is completely tax-free.
Of course, the tax-free and tax-exempt investments will provide high income investors with the most conservative, risk averse option. No investment is safe, but some are safer than others.